AZEC project tracker finds that nearly a third of Japan’s AZEC deals are fossil fuel-related

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Key points:

  • ZCA has launched a new interactive dataset with analysis of the deals signed under AZEC – Japan’s flagship decarbonisation initiative for ASEAN – including the latest deals announced in October 2025.
  • Analysis shows that approximately 31% of AZEC agreements signed since March 2023 involve fossil fuel technologies. 
  • In October 2025, Japan signed 49 new MoUs with ASEAN partners. Of these, 15 (30%) involve fossil fuels, while just 11 (22%) involve renewables.
  • Biomass/biofuels is the most mentioned technology across all AZEC deals. Four of the top 10 technologies are fossil fuel-related: CCUS (2nd), gas and LNG (5th), ammonia and ammonia co-firing with coal plants (6th), and hydrogen (7th).
  • Indonesia leads in the number of AZEC deals signed with Japan, both overall (125 MoUs) and in new deals announced in October 2025 (15 new MoUs).  After Indonesia, Thailand ranks second in the number of AZEC deals signed since March 2023 (43 MoUs), and Vietnam and Malaysia are tied for third (36 MoUs each).
  • Fossil fuel technologies come with emissions, security and cost risks for ASEAN countries. Investing in them could jeopardise the region’s transition and its clean energy goals. 

Fossil fuels are still prevalent in Japan’s flagship decarbonisation initiative for Asia 

The Asia Zero Emissions Community (AZEC) is an initiative launched by Japan in March 2023 to achieve the three goals of “decarbonisation, economic growth and energy security.” AZEC was launched with 10 partner countries, including Australia and nine Association of Southeast Asian Nations (ASEAN) countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Viet Nam. 

A total of 316 AZEC Memoranda of Understanding (MoUs) have been signed between Japan and ASEAN partners since March 2023, including 49 new MoUs announced at the Third AZEC Leaders Ministerial in October 2025

– Visit the AZEC Tracker website for the interactive dataset and latest analysis

New analysis of the technologies planned in the deals finds that 31% involve fossil fuel technologies, the same proportion that involves renewables and electrification tech. Of the MoUs signed in October 2025, 15 (31%) involve fossil fuel technologies and just 11 (22%) involve renewables and electrification.

Four of the top 10 technologies mentioned across all AZEC deals are fossil fuel-related: CCUS ranks second, gas and LNG rank fifth, ammonia and ammonia co-firing with coal plants rank sixth, and hydrogen ranks seventh. All these technologies pose significant risks for ASEAN countries compared to renewable energy generation, including high costs, feasibility limitations, supply security risks, and increased emissions.

– Visit the AZEC Tracker website for a breakdown of technology risks and policy context

In October, ASEAN energy ministers adopted an action plan to increase the share of renewable electricity to 45% of total capacity across the region within the next five years. Deals signed that support the continuing use of fossil fuels risk jeopardising the region’s transition and its clean energy goals. 

– Visit the AZEC Tracker website for the full analysis and figures

Carbon Border Adjustment Mechanisms require coordinated global action

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Key points:

  • A Carbon Border Adjustment Mechanism (CBAM) charges a tariff on imports based on their emissions. Paired with a domestic carbon price, it aims to prevent carbon leakage – companies moving their emitting activities to other countries – and lead to an overall reduction in emissions. 
  • In 2023, the EU started its CBAM – the first to be implemented globally. This was met with a strong reaction from other countries, such as China, South Africa, India and Brazil, which criticised the mechanism for placing an unfair burden on developing countries and for breaking WTO rules. 
  • The EU CBAM will likely only reduce emissions slightly on top of the EU emissions trading system currently in place. An EU carbon price of USD 88 on all emissions reduces emissions by 21%, and the introduction of the CBAM only adds another 1.3 percentage points. 
  • Modelling suggests that the EU CBAM could cost developing countries USD 10.2 billion, with some countries, like Zimbabwe and India, most exposed.
  • The introduction of the EU CBAM has led to the announcement of more climate and international trade measures worldwide as countries try to limit their exposure to it. Thus far, this has resulted in an uncoordinated and confusing policy landscape. 
  • To ensure that climate and trade policies work to reduce global emissions, they should be aligned with UNFCCC principles and should provide exemptions to avoid placing additional burdens on developing countries.

A Carbon Border Adjustment Mechanism is a carbon tariff on import

A Carbon Border Adjustment Mechanism (CBAM) is a policy that charges a carbon price on certain types of imports based on the amount of carbon emissions associated with their production. 

When paired with domestic carbon pricing, it aims to “level the playing field”: A CBAM aims to ensure that when a carbon price is put in place, the higher prices for carbon-intensive domestic goods do not lead to more imports of cheap, carbon-intensive goods from countries where carbon taxes are not in place. It aims to prevent ‘carbon leakage’, where carbon-intensive activities are moved to another location with less regulation on emissions, instead of being reduced, resulting in no overall decrease in emissions.

In the absence of domestic carbon pricing, a CBAM functions as a border tariff targeting carbon-intensive production and is not likely to contribute to further emissions reductions. 

EU CBAM has sparked discussions on climate and trade

In 2023, the European Union started implementing the EU CBAM, the first to be implemented globally. It is designed to ensure EU policies limiting emissions in specific sectors are not undermined by the import of carbon-intensive goods from outside the EU. The European Union writes that the CBAM also aims to “contribute to the promotion of decarbonisation in third countries.”

This has led to a wide range of reactions from different countries, including the development of new CBAMs and other trade policies, as well as harsh criticism. 

At COP28 in Dubai, countries expressed their concerns over the EU CBAM. There was an attempt by the BASIC group of countries – made up of Brazil, South Africa, India and China – to introduce “unilateral trade measures related to climate change” as a point on the COP agenda, which “could have resulted in an impasse in the climate talks.” The proposal received support from 134 countries, including key developing country negotiating blocs and the G77, but was not included in the final agenda. However, according to E3G developing countries’ sentiment towards CBAM and similar initiatives was included in the COP28 final text: “Unilateral measures should not lead to unjustifiable or arbitrary discrimination or restriction in international trade.”

Throughout 2024 and in the lead-up to COP29, discussions on trade measures and climate policy have ramped up. In June 2024, the BRICS group of countries1The BRICS group of countries is made up of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates. released a statement condemning the introduction of trade policies “under the pretext of environmental concerns,” such as “unilateral and discriminatory” CBAMs. This statement was also included in the declaration for the BRICS Summit in October 2024.

Additionally, the BASIC group, chaired this year by China, is again pushing to have trade agreements on the agenda at COP as a separate agenda item, potentially resulting in disputes over trade stalling climate negotiations.

Application of the EU CBAM is ramping up

The EU CBAM was introduced as a component of the European Green Deal, a package of policy initiatives aiming to help the EU reach climate neutrality by 2050. As part of this package, the EU has implemented an emissions trading scheme (ETS), which is a cap-and-trade system to reduce emissions by putting a price on carbon. The ETS allocates a specific amount of emissions allowances to different participants in different industries, including electricity producers, heavy industry and intra-EU aviation. Over time, the cap is lowered and the amount of GHGs these industries are allowed to emit is reduced.

Currently, some ETS participants receive free emissions allowances as they are considered exposed to external trade. The allocation of free allowances means these businesses do not have an incentive to reduce their emissions and can even profit from selling their emissions allowances, if, for example, production levels fall. 

The implementation of the EU CBAM is “aligned with the phase-out of free allowances” under the EU ETS, as both moves reduce opportunities for ‘free’ emissions and therefore“support the decarbonisation of EU industry.” It will take until 2034 for the EU CBAM to be fully phased in and for the free allowances to be fully phased out.

The CBAM entered its ‘transitional phase’ on October 1 2023, which will end at the end of 2025. During this time, importers of affected goods are required to report on emissions but nothing will need to be paid for embedded emissions, which refers to the carbon emissions generated in the production of goods. 

From the start of 2026, the ‘definite period’ will begin and importers will have to purchase and “surrender” certificates corresponding to the carbon emissions embedded in imported goods impacted by the mechanism. This will start off as a small obligation, with businesses only needing to purchase certificates equivalent to 2.5% of their emissions in 2026, and will gradually be ratcheted up to cover 100% of emissions in 2034.

At first, the CBAM will apply to imports “whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.” When the CBAM is fully phased-in, this will account for over 50% of emissions in sectors covered by the ETS. It is also expected that the number of industries included in the CBAM will expand following further assessment to include, for example, ceramics and paper industries. 

The complexity of global trade interlinkages and national policies means that the understanding of what exactly the CBAM would mean is varied and impacts are not always well understood. While a resolution adopted by the European Parliament “stresses that Least Developed Countries and Small Island Developing States should be given special treatment” as the CBAM could potentially impact their development, current CBAM regulation does not provide exemptions from the mechanism for any developing countries.

The EU CBAM is projected to only slightly reduce emissions

The EU CBAM is anticipated to slightly reduce emissions when implemented in alignment with a domestic carbon price. 

A 2021 study conducted by UNCTAD estimated that a carbon price set at USD 88 per tonne of carbon would result in CO2 emissions being reduced in the EU by 704 million tonnes. A CBAM implemented on top of this would reduce emissions outside the EU by 59 million tonnes, but would increase emissions in the EU by 13 million tonnes – a net reduction in emissions of just 45 million tonnes. Therefore, a CBAM results only in a slightly improved overall emissions reduction – equivalent to 6% of the emissions reductions from the carbon pricing mechanisms itself. While an EU carbon price of USD 88 reduces global emissions by 21%, the introduction of the CBAM only adds another 1.3 percentage points.

However, at the same carbon price, a CBAM would reduce carbon leakage by more than half (55%), from 15.1% when only carbon pricing is used to 6.9% when a CBAM is in place. 

Other studies have shown similarly modest reductions in emissions:

  • The Asian Development Bank (ADB) calculated that implementing both the ETS and CBAM with a 100 euro carbon price would reduce global carbon emissions by 1.26%, with the CBAM contributing approximately 0.2% of these emissions reductions, and this would be accompanied by a 0.4% reduction in global exports to the EU. 
  • The African Climate Foundation and the London School of Economics (LSE) calculated that, with a carbon price of 87 euros covering all products, a CBAM would only result in a 0.002% additional reduction in global carbon emissions. This suggests that a CBAM encourages a shift in carbon-intensive production between countries more than it encourages an overall reduction in emissions.
  • The European Commission estimated in 2021 that its initial proposed CBAM design would reduce emissions from affected EU industries by 1% by 2030, while global emissions from these industries would be cut by 0.4% over the same timeframe.
  • A 2009 study by the Brookings Institution and Syracuse University found that any emissions reduction resulting from a CBAM would occur not by incentivising the trade of less carbon-intensive goods, but primarily due to decreased international trade.

In the studies above, estimates of overall global emissions reductions do not consider the knock-on benefits from a CBAM, such as incentivising clean energy investment.

Projected economic impact of the EU CBAM

A fully implemented CBAM should incentivise investment in emissions reductions for carbon-intensive exporters, so they are not required to pay as high tariffs at the EU border. Additionally, it allows exporters whose production of goods is relatively ‘cleaner’ or less carbon-intensive to capture higher margins.  

Based on current emissions intensities, the World Bank’s Relative CBAM Exposure Index shows that Zimbabwe, Ukraine, Georgia, Mozambique and India will be the countries most exposed to the CBAM. Countries such as the US, Australia and the UK will likely have little-to-no exposure to the CBAM. Some countries, such as Colombia and Albania, are anticipated to gain more competitiveness as they produce products covered by CBAM in a way that is cleaner than the EU average.

Figure 1. Countries most and least exposed to the EU CBAM
Source: World Bank, 2023

The 2021 UNCTAD study highlighted that developing countries could lose USD 10.2 billion in income due to the implementation of the EU CBAM. Non-EU countries are anticipated to lose USD 14.2 billion, while the EU gains USD 5.9 billion. Overall, there is a net income loss of USD 8.3 billion. 

Anticipated impacts in other regions include:

Ultimately CBAM’s impact on other economies will depend on how other players globally respond to its implementation. The more countries decarbonise their exports to the EU, the less they will feel its impacts and the greater their margins. Some countries are already considering carbon pricing and other mechanisms that will reduce their exposure to the CBAM.

Announcement of the CBAM has sparked strong reactions 

While the EU supports the introduction of the CBAM as a mechanism to increase climate ambition both within and outside the EU, not all countries share this perspective. 

The CBAM has been perceived as a protectionist measure, particularly by the African negotiating group and BRICS. Criticisms have focused on two areas: the EU CBAM possibly being in violation of World Trade Organization (WTO) rules and burdening developing countries. 

While the EU CBAM has been designed to be compliant with WTO rules, not all countries agree. Countries such as China, Brazil, India and South Africa have criticised the EU CBAM at international fora, including the WTO, for being a unilateral measure – the EU intends to implement it independently and “without requiring consensus or agreement from other countries.” 

India’s Finance Minister Nirmala Sitharaman has denounced the CBAM as a “trade barrier”. Brazil has strongly opposed the policy due to it being “discriminatory” and has warned that it may hamper global climate efforts. However, the EU is “confident the measure would survive a possible challenge at the World Trade Organization because it applies to domestic producers as well imports,” according to the Financial Times.

Developing countries have argued that they are disproportionately burdened by the CBAM, hindering economic growth and “further take[ing] away the ability of developing countries to finance decarbonisation”. As a major exporter, China also strongly opposes the policy. The EU CBAM will expose a lot of Chinese exports to tariffs and it is likely that “similar measures from other countries including the US, UK, Canada and Japan may amplify the exposure of Chinese exports to border adjustment taxes.”

The domino effect

The introduction of the EU CBAM has triggered, both directly and indirectly, a cascade of carbon pricing announcements from other countries. Countries are aiming to reduce their exposure to the CBAM by introducing their own carbon pricing mechanisms and incentivising the production of less carbon-intensive products.

Resources for the Future wrote that implementation of a CBAM could “lead to a virtuous cycle, where more and more countries adopt carbon pricing”. 

The carbon taxes and emissions trading schemes currently in effect worldwide cover almost a quarter of all global emissions. As of September 2024, there were “78 different carbon pricing and taxation mechanisms in the world,” according to WTO Director-General Ngozi Okonjo-Iweala. Between 2009 and 2022, the WTO was notified of over 5500 trade measures linked to climate objectives.

Box 1. Policy responses to the EU CBAM

United Kingdom

In October 2024, the UK government confirmed that it will introduce a CBAM for some sectors from January 2027, with the primary aim of addressing the risk of carbon leakage. The UK CBAM will operate similarly to the EU CBAM but with some differences in the sectors covered. For example, the UK CBAM will not cover imported electricity. 

There have been calls for better alignment with the EU CBAM, “suggesting that this would reduce the economic risk to the UK.” Already the UK steel and energy industry has successfully demanded the UK government align EU and UK mechanisms more closely following the closure of Port Talbot steel works in 2024. 

United States

There has been ongoing debate in the US about potentially implementing a CBAM. However, without a unified domestic carbon pricing mechanism a CBAM would not be able to accurately reflect the emissions-related costs borne by US producers. Without carbon pricing, it would likely only work as a tariff costing foreign exporting countries without requiring domestic producers pay the same fees – therefore not contributing to overall emissions reductions. 

There has been much activity in Congress focused on implementing a CBA-like mechanism. Multiple bills to enact a US version of a CBAM have been introduced, including the Republican-endorsed Foreign Pollution Fee and the Democrat-sponsored Clean Competition Act. Recent statements from Republicans Donald Trump and JD Vance have defended tariffs against dirtier producers to protect US industry. 

Canada

The Canadian government launched a consultation to explore establishing its own CBAM in 2021. 

Australia

In Australia, the government launched a review to assess the potential of a CBAM to prevent carbon leakage. The recommendations are due to be presented before the end of 2024.

Fraying trade relationships between major blocs are driving developed and developing economies to consider their own CBAMs and carbon taxes. The EU has suggested that India consider setting its own carbon price or CBAM to reduce tariff payments to the EU. Malaysia’s Investment, Trade and Industry Ministry has been advised to “think about adopting a carbon tax or carbon pricing more broadly, but also consider adopting its own Malaysian CBAM,” with a pilot in the steel industry.

However, only one of 80 low and lower-middle income countries has implemented a carbon price. Implementing a carbon price could help countries avoid paying higher CBAM fees as exporters will be incentivised to reduce the carbon-intensity of their goods. This raises concerns that they are unprepared for the end of the EU CBAM transition phase in 2025.

Lacking coordination 

The rapid introduction of various carbon pricing mechanisms has so far lacked coordination, resulting in an increasingly confusing global trade landscape. There are also wide disparities in carbon pricing among countries, ranging from as low as  USD 6 per tonne in South Korea to around USD 80 per tonne in the UK and EU in June 2024. 

Governments and stakeholders have expressed concerns that the “evolving patchwork” of national plans could undermine climate action, by fragmenting trade and “fail[ing] to provide businesses with the predictability and assurances they need to drive transformation of production and supply chains.”

The International Institute for Sustainable Development (IISD) warns that because every CBAM regime will be different to comply with national policies, there is a risk that exporters will have to comply with many different requirements, including the measurement, reporting and verification of the carbon embedded in their goods. 

This would make it difficult for developing countries and small producers to meet the high cost of compliance, potentially excluding them from the marketplace. This could restrict international trade, with knock-on impacts for poverty alleviation and sustainable development.

Box 2. Not all CBA mechanisms are made the same

The label ‘CBA’ (carbon border adjustment) can be applied to a wide range of mechanisms. The IISD suggests six key factors in how a CBAM is developed that can greatly affect its potential impact:

  1. Trade scope: Will the tariff be charged only for imports, or also provide rebates for exports? 
  2. Country exceptions: Will there be any tariff exceptions for specific countries, such as developing countries or countries with more ambitious climate policies?
  3. Scope of coverage: Will the mechanism cover only ‘direct’ emissions, or also ‘indirect’ emissions from energy used in the production of products and ‘precursor’ product emissions embodied in imported CBAM goods? 
  4. Carbon accounting methodologies: How will the carbon intensity of products be measured and defined?
  5. Credit for foreign action: If a foreign producer is already subject to a carbon price or climate-related fee in their own country, will this be considered and compensated for?
  6. Use of revenues: How will the funds generated from the CBAM be used? Sending the money back sends a strong signal that the regime was not about protecting domestic producers and could compensate for the need for compliance.

A CBA mechanism would need to be designed to complement distinct national policies, as well as inevitable costs for foreign producers arising even in the “most thoughtfully crafted BCA regime.”

Moving discussions on climate and trade forward

As in previous years, trade-related climate measures are likely to be brought up during discussions at COP29, as countries express their differing views. 

There is a need to create a clearer understanding of the impacts of implementing the EU CBAM, as well as other potential climate and trade measures. International cooperation can help set agreed on principles and best practices for the development of CBA mechanisms, helping to prevent future trade frictions. Without a unifying trade-climate framework, this will lead to prohibitively high costs that disproportionately burden the poorest countries and smaller firms.

Climate and trade goals can be aligned in a way that prioritises fair economic relations and embodies the UNFCCC principles, including “common but differentiated responsibilities and respective capabilities and their social and economic conditions.”

The WTO released a report in October 2024 that outlines “pathways for coordinated approaches on climate action, carbon pricing, and the cross-border effects of climate change mitigation policies with a view to achieving global climate goals.” The International Chamber of Commerce (ICC) has also released a set of “global principles” to guide countries in introducing their own CBAMs and avoid disjointed mechanisms. The principles highlight that CBAMs should support Paris Agreement goals as “the primary objective,” ensure WTO compliance, respect UNFCCCC and Paris Agreement Principles, and provide targeted exemptions for most vulnerable countries. 

Existing and future climate finance commitments and obligations need to be met to enable developing countries to bear the costs of decarbonisation and compliance with CBA mechanisms. A key moment during COP will be discussions on the New Collective Quantified Goal on Climate Finance (NCQG), which has the potential to unlock trillions in critically-needed climate financing for developing countries.

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    The BRICS group of countries is made up of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates.

Expanding the contributor base: a solution for all climate finance woes?

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Key points:

  • Countries are set to prepare a new collective quantified goal for climate financing at the climate conference, or COP, in November 2024. This new goal offers an important opportunity to improve the way that climate finance is provided and increase the goal.
  • According to the OECD, developed countries finally met their objective of providing USD 100 billion in climate finance in 2022. However, this goal was not met on time, and the finance provided up until now has frequently been through instruments that are not necessarily adapted to developing countries’ needs.
  • Needs estimates show that developing countries will need at least USD 1 trillion per year to tackle climate change, illustrating the urgent need for increased financing.
  • To fill this gap, some countries and experts have suggested expanding the contributor base to include certain emerging countries.
  • While there is some justification for certain countries to join the ranks of contributors, most of these countries already contribute voluntarily in line with Article 9.2 of the Paris Agreement. These voluntary contributions are an important source of climate finance for developing countries.
  • Our estimates of a potential addition of more countries to the contributor base show that the current financing gap wouldn’t be significantly reduced even if countries voluntarily providing climate finance were to increase their contributions to the current level of developed countries.
  • Efforts to add new mandatory contributors require a broader discussion on the categorisation of countries under the UNFCCC and the Paris Agreement.

Current financing structures found lacking

Climate change mitigation, adaptation, and loss and damage are and will continue to be expensive, particularly for countries with fewer resources at their disposal. The principle of “Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC)” was enshrined under the 1992 United Nations Framework Convention on Climate Change (UNFCCC) to account for the different historical contributions to climate change and countries’ abilities to support climate action.1Climate Nexus, ‘Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC)’, 23 March 2017, https://climatenexus.org/climate-change-news/common-but-differentiated-responsibilities-and-respective-capabilities-cbdr-rc/. Developed countries, listed in Annex II of the Convention, were given responsibility for taking significant steps to mitigate climate change and to contribute to funding mitigation and adaptation efforts by developing countries (non-Annex countries).2United Nations, ‘United Nations Framework Convention on Climate Change’, FCC/INFORMAL/84/Rev.1(1992), page 21, https://unfccc.int/sites/default/files/convention_text_with_annexes_english_for_posting.pdf.

A first effort to this end was a goal of providing USD 100 billion per year of climate finance for developing countries by 2020 was set for in the nonbinding Copenhagen Accord in 2009.3UNFCCC, ‘Copenhagen Accord’, FCCC/CP/2009/L.7 (2009), https://unfccc.int/resource/docs/2009/cop15/eng/l07.pdf. This target was only met for the first time in 2022, although the USD 115.9 billion mobilised did represent nearly a 30% increase compared to 2021.4OECD, ‘Climate Finance Provided and Mobilised by Developed Countries in 2013-2022’ (OECD, 29 May 2024), https://doi.org/10.1787/19150727-en.

There is now an opportunity to reinvigorate global climate financing structures and accountability. According to the Paris Agreement, countries should agree to a new collective quantified goal (NCQG) for financial support for developing countries to mitigate and adapt to climate change before 2025.5UNFCCC, ‘Durban Platform for Enhanced Action (Decision 1/CP.17) Adoption of a Protocol, Another Legal Instrument, or an Agreed Outcome with Legal Force under the Convention Applicable to All Parties’, 15 December 2015, https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf. This is a key task for COP29 in Azerbaijan in November 2024. This new goal is meant to be needs-based, and while precise estimates vary, the evidence points to the need for at least USD 1 trillion per year.6Natalia Alayza, Gaia Larsen, and David Waskow, ‘What Could the New Climate Finance Goal Look Like? 7 Elements Under Negotiation’, 29 May 2024, https://www.wri.org/insights/ncqg-key-elements. Because of the scale of the financing required, some experts7W. Pieter Pauw et al., ‘More Climate Finance from More Countries?’, Current Climate Change Reports 10, no. 4 (24 July 2024): 61–79, https://link.springer.com/article/10.1007/s40641-024-00197-5. and countries, including Switzerland, Canada and the US,8Matteo Civillini, ‘Swiss Propose Expanding Climate Finance Donors, Academics Urge New Thinking’, Climate Home News, 16 August 2024, https://www.climatechangenews.com/2024/08/16/as-swiss-propose-ways-to-expand-climate-finance-donors-academics-urge-new-thinking/. have suggested expanding the list of countries mandated to contribute, also called the contributor base, to include emerging countries with high emissions and high incomes.

This briefing investigates estimates of funding needs and the current state of funding from developed and emerging countries to shed light on the potential impact of expanding the contributor base.

How much climate finance is needed?

Several estimates exist on developing countries’ needs for climate finance. The UNFCCC Standing Committee on Finance estimates a total of USD 5.8 trillion to USD 5.9 trillion will be needed to cover the costed needs of 153 developing country Parties, based on its assessment of nationally determined contributions (NDCs). This is likely to be an underestimation given that only a small proportion of needs were costed across the documents provided.9UNFCCC Standing Committee on Finance, ‘Executive Summary by the Standing Committee on Finance of the First Report on the Determination of the Needs of Developing Country Parties Related to Implementing the Convention and the Paris Agreement’ (Bonn, Germany: UNFCCC, 2021), https://unfccc.int/sites/default/files/resource/54307_2%20-%20UNFCCC%20First%20NDR%20summary%20-%20V6.pdf. Regionally, around USD 2.5 trillion of global need comes from African states, around USD 3.2 trillion from Asia-Pacific states and around USD 168 billion from Latin American and Caribbean states.

The Independent High-Level Expert Group on Climate Finance put forward the need for a mix of financing from private and public sources to reach USD 1 trillion per year by 2030 for emerging and developing countries10Excluding China. based on financing needs to transform the energy system and pursue a just transition, cope with loss and damage, invest in adaptation and natural capital, and mitigate methane emissions.11V Songwe, N Stern, and A Bhattacharya, ‘Finance for Climate Action: Scaling up Investment for Climate and Development’ (London: Grantham Research Institute on Climate Change and the Environment, London School of Economics, 2022), https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2022/11/IHLEG-Finance-for-Climate-Action-1.pdf. UN Trade and Development (UNCTAD) takes a different approach, suggesting a contribution of around 1% of gross national income (GNI) for climate finance, adding to the 0.7% of GNI that developed countries are supposed to allocate towards official development assistance (ODA). This would raise total funding to approximately USD 1.55 trillion per year by 2030.12United Nations, ‘Considerations for a New Collective Quantified Goal’ (Geneva: United Nations, 2023), https://unctad.org/system/files/official-document/gds2023d7_en.pdf.

Though the final figure these reports come to varies, in essence they tell us the same thing: at least USD 1 trillion per year will be needed to tackle the climate crisis, far above the USD 100 billion goal previously set.

While numbers this big may appear abstract, the funds they represent have real consequences on people’s lives. In the decade to 2022, heat-related deaths increased by 85% compared to the period from 1991 to 2000. By the end of the century, heat-related deaths will affect 683-1,537% more elderly people than currently.13Marina Romanello et al., ‘The 2023 Report of the Lancet Countdown on Health and Climate Change: The Imperative for a Health-Centred Response in a World Facing Irreversible Harms’, The Lancet 402, no. 10419 (16 December 2023): 2346–94, https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(23)01859-7/abstract. And these are but a small fraction of the many health and economic impacts of climate change, illustrating the imperative to do more, faster.

Tracking climate finance – and accounting disagreements – to date

Developed countries have responsibilities under international law due to their historical emissions and their wealth to contribute financially to developing countries for mitigation and adaptation actions.14However, there is little clarity about which countries are defined as developed under the UNFCCC, leading to difficulties in tracking progress. Indeed, while developed countries are noted as being required to provide climate finance (Article 9.1 of the Paris Agreement), there is no specific delineation of which countries should be considered developed. Because of this lack of clarity, there is a de facto practice of relying on the 1992 country lists, with Annex II being often referred to as the developed country list for finance purposes. Other countries are encouraged to contribute under Article 9.2 of the Paris Agreement but are not required to do so.S Colenbrander, L Pettinotti, and Y Cao, ‘A Fair Share of Climate Finance? An Appraisal of Past Performance, Future Pledges and Prospective Contributors’, ODI Working Paper (London: ODI, 2022), 17, https://media.odi.org/documents/A_fair_share_of_climate_finance.pdf. The amount of climate and development finance provided and mobilised by developed countries15In this case, defined by the OECD as Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, European Union, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom and the United States. is regularly tracked by the Organisation of Economic Co-operation and Development (OECD). Its calculations show that the USD 100 billion goal was achieved two years late, in 2022, mainly due to increased public climate finance (Fig. 1).16As of the time of writing, the OECD had not released data breaking down specific country contributions, although other authors have put forward estimates. See for example: L Pettinotti, T Kamninga, and S Colenbrander, ‘A Fair Share of Climate Finance? The Collective Aspects of the New Collective Quantified Goal’, ODI Working Paper (London: ODI, 2024), https://media.odi.org/documents/ODI_2024_Fair_share_climate_finance_new.pdf.

Fig. 1: OECD’s recording of climate finance from developed countries, 2013-2022 (USD billion)

Yet this conclusion has been challenged by other sources that contend that much of this financing is double counted with development aid budgets and includes loans, therefore concluding that the USD 100 billion climate finance goal has not been met. Research by Care International found that only 7% of climate finance from 2011 to 2020 was additional to official development assistance (ODA),17Andrew Hattle, ‘Seeing Double’ (Care International, 2023), https://careclimatechange.org/wp-content/uploads/2023/09/Seeing-Double-2023_15.09.23_larger.pdf. while Oxfam calculated that climate finance was overstated by as much as USD 88 billion.18Oxfam, ‘Rich Countries Overstating “True Value” of Climate Finance by up to $88 Billion, Says Oxfam’ (Oxfam GB, 9 July 2024), https://www.oxfam.org.uk/media/press-releases/rich-countries-overstating-true-value-of-climate-finance-by-up-to-88-billion-says-oxfam/.

Even when the OECD figures are taken at face value, they remain under 1% of the combined GNI of the contributing countries, reaching a maximum of 0.21% of their combined GNI in 2022, according to calculations by ZCA using World Bank GNI data and OECD climate spending data (see Table 1).

Table 1: Climate finance from current contributor base as a proportion of GNI, 2013-2022

ODI has calculated whether developed countries (defined here as Annex II countries) have provided their “fair share” of climate finance by looking at their GNI, cumulative territorial carbon dioxide emissions and population.19The calculation methods were established by Colenbrander, S, Y Cao, L Pettinotti, and A Quevedo. ‘A Fair Share of Climate Finance? Apportioning Responsibility for the $100 Billion Climate Finance Goal’. Working paper. London: ODI, 2021. https://media.odi.org/documents/ODI_WP_fairshare_final0709.pdf.The latest numbers referenced here come from L Pettinotti, T Kamninga, and S Colenbrander, ‘A Fair Share of Climate Finance? The Collective Aspects of the New Collective Quantified Goal.’The think tank finds that in 2022 while some countries like Norway, France and Luxembourg are hitting above their weight, other countries like the US, Greece and Portugal are providing less climate finance than they should be. Overall, according to the analysis, 11 out of 23 countries do not provide their fair share towards helping developing countries mitigate and adapt to climate, with the US providing 32% of its fair share, ahead only of Greece (see Table 2).20L Pettinotti, T Kamninga, and S Colenbrander, ‘A Fair Share of Climate Finance? The Collective Aspects of the New Collective Quantified Goal.’

Fig. 2: Developed countries progress towards meeting their fair share of climate financing in 2022 (%)

Another analysis by Bos, Gonzalez and Thwaites roughly followed this formula, with some variation to try to better account for population size and future development, but have nevertheless found that many developed countries are not providing enough climate finance.21Julie Bos, Lorena Gonzalez, and Joe Thwaites, ‘Are Countries Providing Enough to the $100 Billion Climate Finance Goal?’, 10 July 2021, https://www.wri.org/insights/developed-countries-contributions-climate-finance-goal.

Assessments of the quality of finance also show a lack of ambition from contributors. It is estimated that nearly 95% of current climate finance is in the form of debt (61%) or equity (34%), and around 80% of loans are made at market rates, adding to the debt burden of countries already likely to be over-indebted.22Climate Policy Initiative, ‘Global Landscape of Climate Finance A Decade of Data: 2011-2020’ (Climate Policy Initiative, 2022), https://www.climatepolicyinitiative.org/wp-content/uploads/2022/10/Global-Landscape-of-Climate-Finance-A-Decade-of-Data.pdf. The OECD estimates a lower amount, with bilateral finance loans being 79% concessional loans, 41% of multilateral climate funds and 23% for multilateral development banks. The difference can be attributed to differences in definitions of concessionality.OECD. ‘Climate Finance Provided and Mobilised by Developed Countries in 2013-2022’. OECD, 29 May 2024. https://doi.org/10.1787/19150727-en. Among contributors, the instruments used to disburse financing varies, with Japan and France having been found to tend to give proportionally more loans in their financing mix.23Colenbrander, Pettinotti, and Cao, ‘A Fair Share of Climate Finance? An Appraisal of Past Performance, Future Pledges and Prospective Contributors’, 26–27.

As many developing countries are already highly indebted, this form of climate finance can serve to further weaken the macroeconomic stability of developing countries and divert spending from public services. Least-developed countries and small island developing states spent USD 48 billion repaying such loans to G20 countries between 2020 and 2022, and payment amounts have been increasing over time.24IIED, ‘Climate-Vulnerable Indebted Countries Paying Billions to Rich Polluters’ (IIED, 2023), https://www.iied.org/climate-vulnerable-indebted-countries-paying-billions-rich-polluters.

A shortage of financing directed towards adaptation threatens to exacerbate the issue for vulnerable countries that are unable to take measures to protect themselves from extreme weather events caused by climate change without financing and in the face of high debt servicing requirements. As continued fossil fuel use increases the likelihood of extreme weather events, there will be an increasing need for adaptation financing.25Zero Carbon Analytics, ‘Unnatural Disasters: The Connection between Extreme Weather and Fossil Fuels’ (Zero Carbon Analytics, 2024), http://zaerocarbonlive.local/archives/energy/unnatural-disasters-the-connection-between-extreme-weather-and-fossil-fuels. Adaptation received just 8% of global climate finance recorded by the Climate Policy Initiative in 2020, at USD 56 billion out of USD 665 billion, and against USD 589 billion given to mitigation initiatives.26Climate Policy Initiative, ‘Global Landscape of Climate Finance A Decade of Data: 2011-2020’ (Climate Policy Initiative, 2022), https://www.climatepolicyinitiative.org/wp-content/uploads/2022/10/Global-Landscape-of-Climate-Finance-A-Decade-of-Data.pdf. Meanwhile, the UN Environment Programme estimates that there is a need for USD 215 billion per year for adaptation alone.27United Nations Environment Programme, ‘Adaptation Gap Report 2023: Underfinanced. Underprepared. Inadequate Investment and Planning on Climate Adaptation Leaves World Exposed’ (United Nations Environment Programme, November 2023), 35, https://wedocs.unep.org/handle/20.500.11822/43796;jsessionid=AC69CB2C709FC5BC0FB8124E18F1ED1.

Search for solutions to fill the finance gap

In light of these funding gaps, some stakeholders have considered the logic of expanding the funder base to include emerging countries like China, Brazil and Saudi Arabia.28Matteo Civillini, ‘Swiss Propose Expanding Climate Finance Donors, Academics Urge New Thinking’, Climate Home News, 16 August 2024, https://www.climatechangenews.com/2024/08/16/as-swiss-propose-ways-to-expand-climate-finance-donors-academics-urge-new-thinking/. They assert that the high emissions or high GNI of these countries mean they have a role to play in closing the funding gap.

Researchers have used several methods to determine whether emerging countries should be contributing (more) to climate finance, as there is no agreed-upon threshold or metric to determine which countries should be contributors. Most suggested models aim to compare both income and contribution to climate change of potential contributors to existing contributors, using the median values of GNI and emissions for Annex II countries against those of other countries.

ODI researches propose that non-Annex II countries should become contributors under three thresholds related to per capita GNI or emissions in comparison to a minimum number of Annex II countries. Accordingly, ODI suggests that Brunei, Israel, Kuwait, Qatar, Singapore, South Korea and the United Arab Emirates are potentially good candidates to provide funds.29Colenbrander, Pettinotti, and Cao, ‘A Fair Share of Climate Finance? An Appraisal of Past Performance, Future Pledges and Prospective Contributors’.

Another academic article published in 2024 looks at several metrics for historic emissions and capability to pay, as well as institutional affiliation (EU, OECD, G20) and countries’ payments to other multilateral funds. On the basis of these findings, the paper suggests that Czechia, Estonia, Monaco, Poland, Qatar, Saudi Arabia, Slovenia, South Korea, Turkey, and the UAE would be good candidates.30Pauw, W. Pieter, Michael König-Sykorova, María José Valverde, and Luis H. Zamarioli. ‘More Climate Finance from More Countries?’ Current Climate Change Reports 10, no. 4 (24 July 2024): 61–79. https://doi.org/10.1007/s40641-024-00197-5.

Meanwhile, the Center for Global Development creates multiple models to account for responsibility and capability to pay and finds that Mexico, Poland, Russia, Saudi Arabia, South Korea, Taiwan and the UAE should contribute.31Beynon, Jonathan. ‘Who Should Pay? Climate Finance Fair Shares’. CGD Policy Paper. Washington, DC: Center for Global Development, 2023. https://www.cgdev.org/sites/default/files/who-should-pay-climate-finance-fair-shares.pdf.

What could expanding the contributor base amount to?

To add to the analysis above, we have estimated the amount of financing from the combined group of countries frequently mentioned in the literature or in the press, to understand the financial impact if they contributed at the same rate as developed countries. To do so, we first calculated the average climate finance spending of developed countries32The same developed countries were included as those included in the OECD’s calculations, excluding Monaco for which GNI data is unavailable from the World Bank. as a percent of their GNI, using data from the OECD and the World Bank (see Table 1 above). This equalled 0.21% in 2022, the year with the most up-to-date data and when developed countries met their USD 100 billion target.

We then took this percentage and multiplied it by the GNI of each of the candidate countries. This analysis shows that countries that are not required to contribute to global climate finance have nevertheless raised on average almost 30% of developed countries’ spending, according to the latter’s average GNI contributions (see Table 2, column 5), with a total of USD 12.3 billion in 2022. This methodology likely underestimates the amount of finance given by emerging economies as it only considers multilateral development finance due to data availability limitations. Despite not having any requirements to contribute, these countries are already providing finance for climate action.

It also shows that if countries currently being considered as candidates for mandatory spending contributed at the same rate as developed countries actually provided in 2022, this could raise an additional USD 51.19 billion33This is the sum of all the candidate countries, excluding Czechia, Estonia, Poland, and Slovenia as they are already included in the OECD’s calculations for total climate finance and thus any funding would not be considered additional. or 5.12% of the USD 1 trillion minimum needed to meet developing countries’ needs.

Table 2: Estimated contribution of candidate countries’ spending

Like previous analyses, this evidence does not provide definitive answers to the political question of who should be paying more or less to meet global climate finance needs. But it does show that many countries are already stepping up without any binding rules and that mandating an increase of their participation to the current real level of developed countries will likely not make a meaningful dent in the current financing gap.

Therefore, the literature and the additional evidence provided here reinforce the need for more leadership from developed countries.34S Colenbrander et al., ‘“The New Collective Quantified Goal and Its Sources of Funding: Operationalising a Collective Effort”’, Working Paper (London: ODI, 2023), https://media.odi.org/documents/ODI_The_new_collective_quantified_goal_and_sources_of_funding.pdf. As the Centre for Global Development concludes, “the analysis confirms that developed countries should continue to take primary responsibility, with the USA in particular shouldering at least 40% of the burden in virtually every scenario.”35Beynon, ‘Who Should Pay? Climate Finance Fair Shares’, 13. Other experts agree, noting “If we are to timely address the pressing global needs of emissions reductions; adaptation; and averting, minimising and reducing losses and damages, the contribution of developed countries should remain central to any type of agreement around the NCQG.”36W. Pieter Pauw et al., ‘More Climate Finance from More Countries?’, Current Climate Change Reports 10, no. 4 (24 July 2024): 61–79, https://doi.org/10.1007/s40641-024-00197-5, 76.

Moving finance forward

The NCQG offers the opportunity for countries to come together and hammer out details that have until now been left aside. The three questions raised by ODI should be kept in mind during the upcoming NCQG negotiations: “First, how much should each individual developed country be contributing towards this target? Second, which states should be considered ‘developed countries’ for the purposes of climate finance provision and mobilisation? And third, what counts as climate finance and how can we compare countries’ different contributions and commitments?”.37Colenbrander, Pettinotti, and Cao, ‘A Fair Share of Climate Finance? An Appraisal of Past Performance, Future Pledges and Prospective Contributors’, 14.

While ODI and others have started to put together methodologies to define the level of contribution from developed countries based on historical emissions and ability to pay, the second question of clarifying the definition of the contributor base would require the UNFCCC’s annexes to be reworked and clarified. There have been two changes since the original categorisation in 1992: one in 2002 when Turkey was removed from Annex II, and the second when new EU Member States including Czechia and Malta asked to be put on the Annex I list.38W. Pieter Pauw et al., ‘More Climate Finance from More Countries?’

Expanding the contributor base has been a point of discussion since at least 2009, with strong feelings on both sides and a certain level of “arbitrariness” in any outcome.39W. Pieter Pauw et al., 76. Research recommends several ways forward, including creating a net recipients category and a list of countries excluded from giving finance to ease discussions going forward.40W. Pieter Pauw et al. The ODI recommends a similar approach, proposing the creation of a new category called “non-developed Parties” that would not be required to provide climate finance.41Pettinotti, L, T Kamninga, and S Colenbrander. ‘A Fair Share of Climate Finance? The Collective Aspects of the New Collective Quantified Goal’. ODI Working Paper. London: ODI, 2024. https://media.odi.org/documents/ODI_2024_Fair_share_climate_finance_new.pdf.

Beyond ensuring that the high-level target meets developing countries’ needs, it is critical to answer the ODI’s questions above to create accountability for meeting the target and ensure that reported finance is actually going where it is most needed. This includes discussions around loss and damage, which have remained outside of the financing goal up until now, but is a particularly contentious subject for negotiators,42Alayza, Larsen, and Waskow, ‘What Could the New Climate Finance Goal Look Like?’ and on adaptation, which has been neglected in climate financing to date.43Bos, Gonzalez, and Thwaites, ‘Are Countries Providing Enough to the $100 Billion Climate Finance Goal?’ Finally, the question of transparency and tracking of funds is critical to even be able to measure if what is pledged is delivered.44Bos, Gonzalez, and Thwaites.

Four ways climate policy continuity can contribute to a competitive and resilient EU

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Key points:

  • Climate action remains a priority for EU citizens, showing the need for future EU decision makers to continue to take this area forward. A focus on energy security, cost, competitiveness, and social concerns can provide a winning approach.
  • Policies that reduce emissions have been found to increase energy security, with the RePowerEU Plan illustrating how the EU can take decisive action to lower energy dependence and emissions at the same time.
  • Investing in green technology now can increase competitiveness in the long term and provide cost savings for citizens. Investments in wind and solar have saved EU consumers around EUR 100 billion between 2021 and 2023.
  • Social policy, including retraining programmes and social safety nets, will help ensure people benefit from the development of green industry and technology.

While the June 2024 European Parliament election has moved the ideological needle to the right, this does not erase the pride that citizens have in the EU being a frontrunner in climate action. The most recent Eurobarometer public opinion survey on climate change shows that 77% of people in the EU think climate change is a very serious problem, and a pre-election survey showed 68.5% of people listing climate action among their top priorities when voting, highlighting continued public support for action. This briefing lays out how the EU can continue to act on this strong climate sentiment while accounting for energy security, cost, competitiveness, and social concerns.

Climate policies enhance energy security

In today’s complicated geopolitical context, energy security has become a key political priority, which is being supported by renewable energy development.

In the immediate aftermath of Russia’s invasion of Ukraine, the EU worked to cut dependence on Russian gas and oil while also limiting the extent of energy price increases. The RePowerEU Plan was designed to reduce dependence on Russian fuels by increasing the speed of energy system transition. It did this by reducing energy demand, diversifying energy supply and promoting the production of clean energy, particularly through expanding renewable energy capacity.

The impact of RePowerEU has been dramatic. In 2023, the EU imported just 15% of its gas from Russia, compared with 45% in 2021. Fossil fuels now make up only a third of EU electricity generation, while renewables accounted for 44% in 2023. More electricity was generated from wind alone than from gas last year.

The International Monetary Fund (IMF) examined whether Europe’s climate policies can improve energy security for the region both by their contribution to supply security and resilience to economic shocks.1Europe here means the European Union (EU), the UK and European Free Trade Association (EFTA) countries. The full definition of energy security that the IMF uses is the following: “security of supply, which improves as dependence on energy imports falls and/or imports become more diversified, and economic resilience to energy shocks, which is enhanced when the overall weight of energy spending in GDP declines.” It found that policies to reduce greenhouse gas emissions limit Europe’s reliance on imported energy, diversify sources of energy imports and reduce vulnerability to energy shocks. The IMF report finds that a package of climate measures intended to lower emissions in line with the EU’s Fit for 55 package – which aims to reduce emissions by at least 55% by 2030, compared with 1990 levels – would improve energy security nearly 8% over the same period.2The paper considers the following policy measures: increased carbon prices in the EU and UK emissions trading schemes, increased emissions and performance standards for road transport and buildings, improved permitting processes for renewables, public investment in heat pumps in buildings, and removing fossil fuel subsidies. The same measures would also reduce the energy expenditure of firms and households by improving energy efficiency and increasing renewable capacity, thus expanding available energy supply.

Climate action cuts costs for citizens

Climate action has been shown to cut costs for citizens in a number of cases, meaning it can help tackle the cost of living crisis. Going forward, environmental and climate policy can focus on areas with clear cost savings for citizens to build political support.

The cost of renewable energy has fallen dramatically over the last ten years – renewable energy technologies were out-competing fossil fuels globally even before the Russian invasion of Ukraine and the resulting energy crisis. The most dramatic cost declines between 2010 and 2022 were seen in solar PV (89% cost decrease), onshore wind (69%) and offshore wind (59%).3These are presented here as the global-weighted average levelised cost of electricity (LCOE). In 2022, for example, the average cost of power from new onshore wind projects was 52% lower than the cheapest fossil fuel-fired option.

At times of peak generation for wind and solar PV, electricity prices have been driven down in wholesale markets, and have sometimes turned negative. The International Energy Agency (IEA) estimates that electricity consumers in the EU saved around EUR 100 billion between 2021 and 2023 as a result of wind and solar power replacing fossil fuel generation. This could have been 15% higher if renewable generation had increased more quickly.

The benefits of increasing levels of renewable generation are expected to continue into the future. The IEA projects that electricity prices for EU households will be 22% lower in 2030 compared with 2022 if countries achieve the low-carbon measures in its most ambitious Net Zero Emissions scenario. Electricity prices for EU industry would fall by around 14% in the same period.

As both the IEA and the IMF argue, taking early action to transition to a more sustainable energy system would be cheaper for countries than delaying action until the last minute. Early action allows planning and incremental steps while delay means that polices will need to be much more stringent and costly in order to succeed, and as a result energy prices will be higher. For example, a study in the UK compared lost savings from delayed green policies on energy, food, housing and cars, and found that delaying their implementation had cost households as much as GBP 4,350 over the span of two years.

Electromobility is another example where cost savings are there for the taking, as running and maintaining electric vehicles (EV) is cheaper than internal combustion engine (ICE) vehicles. The IEA estimates that electric cars will reach price parity by 2030, and as early as 2026 for medium-sized cars in Europe, a timely change as the EU’s 2035 phase out goal for new ICE vehicles approaches.4In Germany, for example, EVs already have lower net costs than ICE vehicles. European car manufacturers have stepped up to lower costs, and policy support through initiatives like social leasing can help lower-income consumers get access to EVs.

Investing in green technology increases competitiveness

While technological solutions cannot solve every environmental challenge on their own, there are a number of green technology investments that can have big returns and have been receiving political support.

Europe aims to nearly double renewable energy capacity by 2030, reaching 20% of total global capacity. Almost all of the European total comes from within the EU, making the bloc a key global player in decarbonisation, second only to China in its capacity ambitions.

The global market for key net zero technologies is projected to triple from 2023 levels to around USD 650 billion per year by 2030. The IEA highlights the unprecedented investment that is currently taking place in renewable energy: for example, almost twice as much was invested in clean energy than in fossil fuels globally in 2023.5The IEA defines clean energy as renewables, grids and storage, hydrogen, large-scale heat pumps and energy efficiency. It also includes relatively small investments in nuclear power and fossil fuels with carbon capture, utilisation and storage (CCUS). This trend is expected to continue as countries decarbonise their energy systems. In electricity, solar power investment exceeded investment in all other generating technologies combined in 2023.

In response, the leading economies in the net zero transition – China, the US and the EU – have all set out industrial strategies to encourage the growth of renewable energy technology manufacture, as well as targets for deploying the technologies. This reflects a ‘race to the top’ as countries compete to build, export and deploy renewables, electric vehicles and heat pumps. The EU’s Net Zero Industry Act is designed to reduce reliance on imports and promote net zero technology manufacture, with the aim that green technologies produced in the EU provide at least 40% of EU deployment by 2030,6The technologies covered are solar PV and thermal, electrolysers and fuel cells, on- and off-shore wind, sustainable biomass and biomethane, batteries and storage, heat pumps, geothermal, electricity grid technologies, and carbon capture and storage. thereby increasing the EU’s competitiveness and energy independence.

The current EU Green Deal and larger policy framework helps the EU compete on green technology, although more investment is needed to consolidate its green tech industries. Cap and trade policies can also further spur investment in sustainable technologies, as they create an expectation that emissions will need to be reduced. The EU Emissions Trading System (ETS) already covers emissions from the manufacturing and energy industries, maritime transport and aviation, while ETS2 will phase in emissions from buildings and road transport over the next three years.

Putting climate and social action together

The shift to new, clean industries brings with it opportunities to create new jobs. Employment in the clean energy sector increased by more than 5% globally in 2022, largely driven by the solar PV and electric vehicle sectors. In comparison, fossil fuel-related jobs fell by 4% in 2022. Clean energy jobs now outnumber those in fossil fuels globally.

The IEA expects high-skilled energy positions to increase by 6.6% per year in the EU between 2022 and 2030, and medium-skilled jobs to increase by 7.8% per year. Up to 1 million new jobs could be created in green transition industries in the EU by 2030.

One of the critiques leveled at the European Green Deal by trade union groups and researchers was that it was leaving people behind, particularly already-vulnerable groups like women and those on low incomes due to distributive effects or workers in sectors that need to shift course dramatically.

Support for retraining will ensure that people have the skills to take up new green jobs. The EU’s Green Deal Industrial Plan puts forward a course of action and the 2020 European Skills Agenda set ambitious goals to ensure that the region has enough skilled workers to meet the increasing demand in the clean energy sector. This includes reskilling and upskilling workers from fossil fuel sectors to transfer their expertise to new technologies.

In terms of policy to support this, OECD analysts suggest a number of tools including targeted social protection, housing allowances, and compensatory transfers to offset any economic effects on the poorest citizens. Incentives can be put in place to rebuild green employment opportunities in areas where polluting industry jobs are lost, where possible. Other researchers have pointed towards the need for a new social contract that takes into account the reality of the changes to be wrought by climate change – and the effects of those that may occur in mitigating them.

Building the consensus to get it done

This approach to climate policy at the nexus of technology, competitiveness, security and social sustainability creates the opportunity to build up a new, broad coalition in favour of European climate action in the post-election context.

Decision-makers have spoken up in support of this new approach to climate. Current heads of state and government, as assembled in the European Council, agree, writing “We will anticipate potential challenges and seize the opportunities for our Union in the green and digital transitions, in order to ensure the sustainability of our economic model, leaving no one behind.” Platforms of all parties except ECR largely include references to renewables for security and boosting greentech investment. French President Emmanuel Macron (Renew) and German Chancellor Olaf Scholz (Socialists & Democrats) wrote that to take on global geopolitical issues, there is a need to “[strengthen] our global competitiveness and [enhance] our resilience while making the Green Deal and the digital transition a success.”

In the business community, BusinessEurope and the German Chamber for Industry and Commerce have remained firm that they want the climate targets to remain, but stated that there needs to be a bigger emphasis on competitiveness. Furthermore, green businesses have called for a continuation of the Green Deal to maintain regulatory stability and support competitiveness.

EU cities, regions, worker and civil society groups are on board. The European Committee of the Regions, which represents cities and regions in EU policy making, created 29 recommendations, including continuing the Green Deal while reinforcing its competitiveness, inclusivity and social elements. EU civil society, employers, and workers, as represented by the European Economic and Social Committee, have proposed a social deal to go along with the Green Deal 2.0 to make sure that no one gets left behind.

  • 1
    Europe here means the European Union (EU), the UK and European Free Trade Association (EFTA) countries. The full definition of energy security that the IMF uses is the following: “security of supply, which improves as dependence on energy imports falls and/or imports become more diversified, and economic resilience to energy shocks, which is enhanced when the overall weight of energy spending in GDP declines.”
  • 2
    The paper considers the following policy measures: increased carbon prices in the EU and UK emissions trading schemes, increased emissions and performance standards for road transport and buildings, improved permitting processes for renewables, public investment in heat pumps in buildings, and removing fossil fuel subsidies.
  • 3
    These are presented here as the global-weighted average levelised cost of electricity (LCOE).
  • 4
    In Germany, for example, EVs already have lower net costs than ICE vehicles.
  • 5
    The IEA defines clean energy as renewables, grids and storage, hydrogen, large-scale heat pumps and energy efficiency. It also includes relatively small investments in nuclear power and fossil fuels with carbon capture, utilisation and storage (CCUS).
  • 6
    The technologies covered are solar PV and thermal, electrolysers and fuel cells, on- and off-shore wind, sustainable biomass and biomethane, batteries and storage, heat pumps, geothermal, electricity grid technologies, and carbon capture and storage.

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